Working capital management and firm profitability: Insights and strategies in the context of economic uncertainty and the COVID-19 pandemic

Kumar, Sanjeev and Olasiuk, Hanna Petrivna (2024) Working capital management and firm profitability: Insights and strategies in the context of economic uncertainty and the COVID-19 pandemic. In: 46th EBES Conference, January 10-12, 2024, Sapienza University of Rome Rome, Italy.

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Objective: The primary aim of this study is to investigate the association between the efficiency of working capital management (WCM) and the profitability of manufacturing companies in India, focusing on how the COVID-19 pandemic has influenced these dynamics as an external policy shock. Data and Methods: Our research examined a comprehensive dataset comprising 2,312 firms manufacturing companies listed on India's National Stock Exchange (NSE) from 2015 to 2021. We employed fixed effects panel regression models to investigate the significance of working capital management efficiency and profitability in the context of the COVID-19 pandemic. Additionally, we conducted a difference-indifferences (DID) analysis, utilizing the year 2020 as a reference point to assess the impact of the external policy shock caused by the COVID-19 pandemic. Results: Our empirical findings reveal a negative correlation between the cash conversion cycle (C2C) and the return on assets (ROA), indicating that an extended C2C duration corresponds to a diminished ROA. Likewise, we observe a similar adverse relationship between the leverage ratio and ROA. Our analysis identifies leverage Interest Coverage Ratio (ICR), Current Ratio (CR), and firm size as significant factors impacting a company's profitability. To enhance their profitability, firms should consider reducing their leverage, favoring equity-based financing, and endeavor to increase their Current Ratio. Conclusions: This study illustrates the vital connection between effective working capital management and firm profitability, particularly during the challenging backdrop of the COVID-19 pandemic. It recommends enhancing the cash conversion cycle to boost profitability, highlighting its significance in economic uncertainty. The research reveals a consistent and substantial correlation between these factors, offering valuable insights for smaller, unlisted firms. Notably, companies with superior working capital management performed better during the pandemic

Item Type: Conference or Workshop Item (Paper)
Keywords: Working Capital Management | Manufacturing Firms | Profitability | Cash to Cash Cycle | Returns on Assets
Subjects: Social Sciences and humanities > Business, Management and Accounting > Business and International Management
Social Sciences and humanities > Economics, Econometrics and Finance > Economics
Social Sciences and humanities > Social Sciences > Social Sciences (General)
JGU School/Centre: Jindal Global Business School
Depositing User: Subhajit Bhattacharjee
Date Deposited: 29 Jan 2024 11:56
Last Modified: 29 Jan 2024 11:56
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